In an article entitled “Trichet Signals Rate Changes Aren’t Imminent”, Jean-Claude Trichet, the President of the European Central Bank, says just the opposite, mincing words just to be politically correct. At the same time in a speech in Berlin he praises twelve and a half years of vigilance about inflation on the part of the European Central Bank. For countries such as Germany inflation is always the big bugaboo and has been so since the hyper-inflation of the 1920s in the wake of World War I led to the rise of Adolf Hilter and that country’s defeat in World War II.
Thus the European Central Bank won’t raise rates at its next meeting in June but will wait for July after raising rates in April to 1.25%, up 1/4 point and the first increase in 3 years. They expect to raise it to 2% in 2012 by 1/4 point increments. The economies of Germany, Frnace, and the Netherlands, the places where most of the output of the European Union occurs, are overheating. Already the inflation rate is 2.8% and soon to be 3% when everyone agrees it shouldn’t be more than 2%.
If increasing the interest rates does damage to the economies of Spain, Portugal, Greece, and Ireland, Germany doesn’t know what to do. The voters don’t want to give out more aid to Greece when they are not going to be paid back. But they should consider that the price of their new economic empire. That is in some respects as important as paying attention to inflation.